Cosmetic Warriors Ltd v Gerrie

The Court of Appeal construed the pre-emption provisions in Article 5 of the companies' Articles of Association. The court held that the definition of the "prescribed price" in Article 5C requires the independent accountants to fix a value per share derived from a valuation of the company as a going concern, so that the prescribed price is calculated pro rata from the value of the whole equity rather than as the market price for the block of transfer shares. The court also held that the phrase "any person" in Article 5L is not confined to natural persons and therefore includes corporate transferees. The court dismissed the appeal against the deputy High Court judge's construction and left open Issue 2 (the valuation of separate tranches) because it did not arise if Issue 1 is decided against the appellants.

This was an appeal from the Chancery Division ([2015] EWHC 3718 (Ch)) concerning the interpretation of shareholders' pre-emption rights in materially identical Articles of Association of two private companies. The claimants (Cosmetic Warriors Limited and Lush Cosmetics Limited) sought declarations about the operation of Article 5 after minority shareholders (Mr Gerrie and Ms Hawksley) served transfer notices for their combined shareholdings. The High Court deputy judge answered the agreed questions largely in the defendants' favour; the claimants appealed in respect of two issues.

Background and procedural posture

• The Articles provided a default "prescribed price" to be fixed per share by two independent chartered accountants "as between a willing buyer and a willing seller valuing the Company on a going concern basis", with subsequent pre-emption procedures and a 90-day residual power to transfer unsold shares "to any person" at not less than the prescribed price.
• After employment relations broke down and transfer notices were served, the parties disagreed on valuation methodology and on whether Article 5L permitted transfers to corporate transferees. The companies issued a Part 8 claim for declarations; the deputy judge decided in favour of the shareholders on the principal issues. The companies appealed to the Court of Appeal (permission given by David Richards LJ).

Issues framed

1. Whether the accountants should value the shares by reference to a pro rata proportion of the value of the whole company or by reference to the market price for the block of Transfer Shares (the "block" or minority/majority status taken into account).
2. If the block approach applied, whether different tranches (the sole-held shares and the jointly held shares) must be valued separately or together (left open in the court below and by the Court of Appeal since issue 1 was determinative).
3. Whether the words "any person" in Article 5L exclude corporate transferees.

Reasoning and outcome

The Court of Appeal applied ordinary contractual interpretation principles (as explained in Arnold v Britton and Rainy Sky) and considered the text, structure and commercial context of Article 5. It held that the definition in Article 5C unambiguously and naturally requires the accountants to determine a sum per share derived from valuing the company on a going concern basis, and that such a construction is workable given the uncertainties created by other provisions (lots, applications, pro rata allocation, company sale under 5G and residual transfers under 5L). The court rejected the appellants' submission that the words later in Article 5C requiring valuation of the "Transfer Shares" compel a block valuation. The court also rejected a restrictive reading of "any person" in Article 5L, holding that, absent clearer language, "person" retains its ordinary legal meaning and includes corporate transferees. The appeal was dismissed; Issue 2 was not determined as it did not arise given the decision on Issue 1.

The appeal is dismissed. The Court of Appeal upheld the deputy High Court judge's construction of Article 5: the accountants must determine the prescribed price as a sum per share derived pro rata from a valuation of the company as a going concern (not as a block market price for the Transfer Shares), and the phrase "any person" in Article 5L includes corporate transferees. Issue 2 (valuation of separate tranches) was left open as it did not arise.

Appeal to the Court of Appeal from the Chancery Division (Deputy Judge Richard Spearman QC) decision reported at [2015] EWHC 3718 (Ch). Permission to appeal was granted by David Richards LJ. The Court of Appeal delivered judgment at [2017] EWCA Civ 324.